Why Citi Turned Around on Mortgage “Cramdowns”

The latest data show one out of ten homeowners in the United States either are late paying their mortgages or in such serious arrears they risk foreclosure. Last week, congressional Dems breathed a sigh of relief when Citigroup dropped its opposition to a change in the bankruptcy laws allowing distressed homeowners to do what owners of commercial property and second homes can already do when they can’t pay up — use bankruptcy proceedings as a means of working out better deals. (It’s called a “cram-down.” The practical effect wouldn’t be hundreds of thousands of bankruptcy judges striking new deals, as conservative lawmakers predict; the mere option of going into bankruptcy would give homeowners more bargaining leverage with mortgage lenders in striking better deals.)

As long as Citigroup opposed this measure, it didn’t stand a chance. Citi’s clout in Washington is legendary. But on January 8, Citigroup’s CEO, Vikram Pandit released a statement saying that Citi “believes it will serve as an additional tool to the etensive home retention programs currently iin place to help at-risk borrowers.” The announcement was greeted with kudos by House and Senate Dems. The bankruptcy provision is now moving, and is likely to be attached to the stimulus bill.

What happened? Until last Thursday, Citi had been a leader of the Bankruptcy Coalition of the Financial Services Roundtable, an industy group that had staunchly opposed the bill — along with Bank of America, JP Morgan Chase, and Wells Fargo.

Could it be that Citi’s Pandit knew last week that he’d soon need even more help from Congress than the $45 billion bailout the bank already received? Shares of Citigroup had seemed to regain their footing after the bailout. But then, this Monday, all hell broke loose. Citi shares plunged 17 percent, as investors got word of a deal Citi was cooking to sell its valuable Smith Barney brokerage unit to Morgan Stanley. The drop in Citi shares brought the stock back to the lowest level since the government gave Citi its first dollop of bailout funds last November. Citi is losing capital at an astounding rate — nearly $100 million a day in the fourth quarter alone. The firm is expected to report its fifith consecutive quarterly multibillion loss next week.

Citi has already got the sweetest bailout deal of any big bank, but the probability seems high that it will want more bailout money. This seems to easiest explanation for Pandit’s turnaround on something the Democratic Congress and distressed homeowners very much want. In other words, the Wall Street bailout has had exactly the same effect for Congress that the proposed bankruptcy provision would have for homeowners — it has increased its bargaining power over those who ordinarily pull the strings. The massive tax-payer financed bailout of Wall Street, largely a product of Wall Street’s power in Washington, seems to be weakening the Street’s ability to veto financial legislation it doesn’t like.

Robert Reich is the nation's 22nd Secretary of Labor and a professor at the University of California at Berkeley.

He has served as labor secretary in the Clinton administration, as an assistant to the solicitor general in the Ford administration and as head of the Federal Trade Commission's policy planning staff during the Carter administration.

He has written eleven books, including The Work of Nations, which has been translated into 22 languages; the best-sellers The Future of Success and Locked in the Cabinet, and his most recent book, Supercapitalism. His articles have appeared in the New Yorker, Atlantic Monthly, New York Times, Washington Post, and Wall Street Journal. Mr. Reich is co-founding editor of The American Prospect magazine. His weekly commentaries on public radio’s "Marketplace" are heard by nearly five million people.

In 2003, Mr. Reich was awarded the prestigious Vaclev Havel Foundation Prize, by the former Czech president, for his pioneering work in economic and social thought. In 2005, his play, Public Exposure, broke box office records at its world premiere on Cape Cod.

Mr. Reich has been a member of the faculties of Harvard’s John F. Kennedy School of Government and of Brandeis University. He received his B.A. from Dartmouth College, his M.A. from Oxford University, where he was a Rhodes Scholar, and his J.D. from Yale Law School.